New York Attorney General to File Against Ernst & Young

Published by: Frank Galvano on 20th Dec 2010 | View all blogs by Frank Galvano
Ernst And Young logo.jpg
New York Attorney General to File Against Ernst & Young

New York Attorney General Andrew Cuomo is expected to file a lawsuit against Ernst & Young LLP as early as today.  The suit will accuse the company of aiding Lehman Brothers Holdings Inc. in misleading investors, according to a source close to the matter.

The basis of the lawsuit will revolve around Ernst & Young's quarterly reviews and audits of Lehman's financial statements which the suit alleges downplayed Lehman's liabilities.  Ernst & Young would be accused of violating New York state's Martin Act, a securities fraud statute.

Lehman Bros., which was at one time the nation's fourth-largest investment bank, collapsed in September 2008 thanks to a series of risky real estate investments and excessive debt, which it tried to hide from investors by using so-called Repo 105 trades, according to bankruptcy court records.  Those records also indicated that Ernst & Young could be held liable for “professional malpractice” for its role as auditor in Lehman's activities.

Cuomo is expected to file the lawsuit before he is sworn in as New York's new governor, on January 1st.  It is unknown how the new Attorney General, Eric T. Schneiderman, will proceed with the case when he takes over the post.

Repo 105 trades are a form of short-term financing that Lehman used to move as much as $50 billion in debt off of its balance sheets temporarily to convince investors it was carrying less debt than it actually was.  The Repo 105 trades were in fact sale and repurchase agreements, so that Lehman was contractually obligated to buy them back, increasing their debt again.  A spokesman for Cuomo's office has declined to comment on the story, as have spokesmen for Ernst & Young.

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